UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended APRIL 30, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______
COMMISSION FILE NUMBER 333-4513RENCO METALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3724916
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
238 NORTH 2200 WEST SALT LAKE CITY, UTAH84116
(Address of principal executive offices) (Zip Code)
(801) 532-2043
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
/ / YES /X/ NO
Number of shares outstanding of each of the registrant's classes of common
stock, as of June 12, 2000:
COMMON STOCK, NO PAR VALUE 1,000 SHARES
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RENCO METALS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared from the accounting records of Renco Metals, Inc. (Renco Metals)
and its subsidiaries (the Company), Magnesium Corporation of America
(Magcorp), and Sabel Industries, Inc. (Sabel), without audit (except
where presented data is specifically identified as audited) pursuant to
the rules and regulations of the Securities and Exchange Commission.
Renco Metals is a 100% owned subsidiary of The Renco Group, Inc. (Group).
The financial statements reflect all adjustments (consisting solely of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods
presented. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the full
year. These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended
October 31, 1999.
Renco Metals' 11.5% Senior Notes due 2003 (Senior Notes) are
unconditionally and fully guaranteed, jointly and severally, by both of
its subsidiaries, Magcorp and Sabel (the Guarantors), each of which is
wholly-owned. Separate financial statements of the Guarantors are not
presented because, in management's opinion, such financial statements
would not be material to investors because Renco Metals is a holding
company with no independent operations and its only assets are cash and
its investment in Magcorp and Sabel. Summarized financial information on
the combined Guarantors is presented below:
[Enlarge/Download Table]
SUMMARIZED COMBINED GUARANTOR FINANCIAL INFORMATION
---------------------------------------------------
Six months Three months
Ended April 30, Ended April 30,
2000 1999 2000 1999
------------- ------------- ------------- ------------
(dollars in thousands) (dollars in thousands)
Statement of operations data:
Net sales $ 79,696 $ 87,567 $ 40,543 $ 45,947
Cost of sales $ 61,524 $ 60,313 $ 30,673 $ 31,545
Net income (loss) $ (5,530) $ 5,422 $ (2,137) $ 1,972
October 31,
APRIL 30, 1999
2000 (Audited)
------------- ------------
(dollars in thousands)
Balance sheet data:
Current assets $ 73,674 $ 78,701
Noncurrent assets $ 49,441 $ 45,508
Current liabilities $ 12,357 $ 14,701
Noncurrent liabilities $ 21,702 $ 14,922
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.RESULTS OF OPERATIONS - SIX MONTHS ENDED APRIL 30, 2000 COMPARED TO SIX MONTHS ENDED APRIL 30, 1999
SALES for the six-month period ended April 30, 2000 decreased 9.0% over the
corresponding prior period. The decrease was attributable to a 13.1% decrease in
Magcorp's revenues partially offset by a 3.0% increase in Sabel's revenues.
Magnesium shipments decreased 8.3% and Magcorp's average selling price for
magnesium decreased 5.9% when compared to the corresponding six-month period in
1999. Import competition from foreign producers continues to put pressure on
magnesium pricing and volumes. Magnesium pricing and volume are dependent on the
overall market supply and demand, and there is no certainty that current trends
will not continue. Sabel's sales increase was due to overall price increases in
the U.S. steel industry.
COST OF SALES for the six-month period ended April 30, 2000 increased 2.0% on a
consolidated basis. Magcorp's cost of sales increased 3.8% due primarily to
higher production costs at Magcorp caused by low production levels and high
natural gas costs. Cost of sales at Magcorp was also adversely affected by
increased processing costs associated with increased volumes of recycled
magnesium. When compared to the corresponding six-month period in 1999, Magcorp
increased its participation in die cast markets, which also requires handling
and recycling of die cast customer scrap, increasing costs and decreasing
margins. Magcorp's cost of sales increase was offset by a 3.6% cost of sales
decrease at Sabel attributable to volume decreases incurred while margins
increased in the U.S. Steel industry as mentioned above.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the six-month period ended April30, 2000 decreased 12.2% due to certain long-lived assets originally capitalized
at the time of Magcorp's acquisition in 1989 becoming fully depreciated, offset
by increased depreciation for recently acquired capital equipment additions.
INTEREST INCOME for the six-month period ended April 30, 2000 decreased $239,000
due to decreased cash and cash equivalent balances on hand.
INTEREST EXPENSE for the six-month period ended April 30, 2000 increased
$107,000 due to higher revolving credit facility borrowings at Magcorp.
Revolving credit facility rates are based on the prime rate, which also
increased during the period.
INCOME TAXES for the six-month period ended April 30, 2000 were zero. Effective
November 1, 1998, the Company was designated as a qualified subchapter S
subsidiary by Group. Accordingly, the Company is generally not subject to income
taxes. As a result of the subchapter S designation, during the six months ended
April 30, 1999the Company recognized an income tax benefit of $2.1 million that
included the elimination of net deferred tax liabilities recorded as of October31, 1998.
RESULTS OF OPERATIONS - THREE MONTHS ENDED APRIL 30, 2000 COMPARED TO THREE MONTHS ENDED APRIL 30, 1999
SALES for the three-month period ended April 30, 2000 decreased 11.8% over the
corresponding prior period. The decrease was attributable to a 17.1% decrease in
Magcorp's revenues partially offset by a 3.8% increase in Sabel's revenues.
Magnesium shipments decreased 11.4% and Magcorp's average selling price for
magnesium decreased 7.1% over the corresponding 1999 three-month period. Import
competition from foreign producers continues to put pressure on magnesium
pricing and volumes. Magnesium pricing and volume are dependent on the overall
market supply and demand, and there is no certainty that current trends will not
continue. Sabel's sales increase was due to overall price increases in the U.S.
steel industry.
COST OF SALES for the three-month period ended April 30, 2000 decreased 2.8% on
a consolidated basis. Magcorp's cost of sales decreased 3.2% due primarily to
lower sales volumes, partially offset by higher production costs at Magcorp
caused by production levels being below capacity. A 1.3% cost of sales decrease
at
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Sabel was attributable to volume decreases incurred while margins increased in
the U.S. Steel industry as mentioned above.
DEPRECIATION, DEPLETION, AND AMORTIZATION for the three-month period ended April30, 2000 decreased 19.0% due to certain long-lived assets originally capitalized
at the time of Magcorp's acquisition in 1989 becoming fully depreciated, offset
by increased depreciation for recently acquired capital equipment additions.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES for the three-month period ended
April 30, 2000 decreased 3.3% due in large part to profit-based deferred
compensation accrual adjustments.
INTEREST INCOME for the three-month period ended April 30, 2000 decreased
$89,000 due to decreased cash and cash equivalent balances on hand.
INTEREST EXPENSE for the three-month period ended April 30, 2000 increased
$122,000 due to higher revolving credit facility borrowings at Magcorp.
LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise from working capital requirements, capital
investments and interest payment obligations. The Company's primary source of
liquidity has historically been cash provided by operating activities. The
Company also has available $40.0 million in revolving credit facilities that
provide for advances by the lender based on specified percentages of eligible
accounts receivable and inventories to a maximum of $33.0 million for Magcorp
and $7.0 million for Sabel, net of outstanding letters of credit. As of April30, 2000, the unused amounts available to Magcorp and Sabel were approximately
$21.8 million and $2.2 million, respectively. During the six-month period ended
April 30, 2000, Magcorp and Sabel borrowed net amounts of $5.4 million and $2.0
million, respectively, under their revolving credit facilities.
Cash used in operating activities was $4.9 million for the six-month period
ended April 30, 2000 compared to $899,000 provided by operations for the
corresponding prior period. The $5.8 million increase in cash used in operations
when compared to the comparable period in 1999 resulted primarily from decreased
operating income, partially offset by favorable changes in working capital
items, most notably decreased accounts receivable levels and smaller increases
in inventory levels. The reduced operating income is attributable to lower sales
volume and pricing from increased import competition in the magnesium operations
and by lower margins earned on increased participation in die cast market
products as discussed above. Magnesium pricing and volume are dependent on the
overall market supply and demand, and there is no assurance that current trends
will not continue.
Capital expenditures were $8.5 million for the six-month period ended April 30,2000, and are budgeted to total approximately $20 million for 2000, $10 million
for 2001, and $9 million for 2002. Of these projected capital expenditure
amounts, an estimated total of $31 million is related to new electrolytic cell
technology that is expected to improve manufacturing efficiencies and ensure
compliance with future environmental standards. Original plans for complete
plant conversion have been scaled back and timing of the project has been
revised to allow some flexibility due to reduced cash flow from operations
caused by worsened market conditions. As a result, conversion of the cells is
now expected to commence in late fall of 2000 and take place over a period of
approximately two years. Associated cost reductions and related manufacturing
efficiencies will occur gradually as conversion progresses, but will not be
fully realized in the Company's operating results until 2002.
Management anticipates that existing cash balances, cash generated from
operations, and availability under its revolving credit facilities will be
sufficient to finance the Company's liquidity needs through the end of the
current fiscal year. However, if magnesium market conditions continue to
deteriorate, in order to fund its planned capital expenditures, the Company is
considering additional sources of liquidity. In this regard, the Company is
currently in discussions with its primary lender to increase availability under
its revolving credit facilities.
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The Company's long-term debt agreements contain numerous covenants and
prohibitions that limit the financial activities of the Company, including
requirements that the Company satisfy certain financial ratios and limitations
on additional indebtedness. The ability of the Company to meet its debt service
requirements and to comply with such covenants will be dependent upon future
operating performance and financial results of the Company, which will be
subject to financial, economic, political, competitive and other factors
affecting the Company, many of which are beyond its control.
ENVIRONMENTAL MATTERS
Title III of the Clean Air Act will establish, on a published schedule, new
national emission standards for hazardous air pollutants (NESHAPS). NESHAPS are
to be based on maximum achievable control technology as determined by a
comparison of installations at similar facilities in specific industry
categories. Representatives from the United States Environmental Protection
Agency (EPA) have visited Magcorp's facility in preparation for the process of
establishing NESHAPS for chlorine and hydrogen chloride emissions. It is
expected that Magcorp will be required to make substantial reductions in
chlorine emissions to meet NESHAPS for primary magnesium refineries that will be
promulgated by mid-2002, with an expected three to five year timetable for
compliance following promulgation of the new standards.
In anticipation of the new standards, Magcorp has embarked on a program to
install new electrolytic cell technology that will reduce chlorine emissions at
the source. The new cells are also expected to significantly reduce costs
because they have much higher throughput and are more energy efficient. As noted
above, cell conversion is expected to commence in late fall of 2000 and take
place over approximately two years. With respect to hydrogen chloride, Magcorp
has recently installed and is successfully operating scrubbers to reduce
pertinent emissions. Magcorp does not expect that it will be required to spend
significant additional amounts to meet the new standards for hydrogen chloride.
Magcorp plans to spend an estimated $30 to $35 million of its total capital
expenditure budget through 2002, directly or indirectly, to meet environmental
regulatory requirements, primarily for NESHAPS, and for other anticipated future
requirements. Prototype cell-related project development expenses to date total
$7.0 million. There can be no assurance that Magcorp's cell conversion program
will be successful, and to the extent it is not successful, it could have a
material adverse effect on the Company's financial condition and results of
operations.
Representatives of the Utah State Department of Environmental Quality (UDEQ)
Division of Solid and Hazardous Waste visited Magcorp in 1994 regarding the
issue of whether piles of material generated in the electrolytic process, which
cover an extensive land area at Magcorp's Rowley facility, can be classified as
a hazardous or solid waste, and if so classified, what measures might be
required to investigate and address these piles. No similar material has been
classified by the State as hazardous or solid waste. The State accepted
Magcorp's written storage plan, which does not consider the piles hazardous and
under which no remediation or action by the Company is necessary. If the piles
were at some point in the future to be classified as hazardous waste, thereby
becoming subject to State regulation, corrective action could be required. The
costs of such compliance, if any, could be material; however, such costs cannot
be assessed at this time.
Sampling conducted by Magcorp and by UDEQ in 1998 indicated a low but measurable
accumulation of chlorinated hydrocarbons in the form of dioxin/furan compounds
in soil and sediment samples from a contained and permitted process wastewater
collection and retention system used at the Magcorp plant site for over 25
years. While Magcorp does not consider, and believes that UDEQ does not
consider, a health hazard to be associated with these preliminary sampling
results, Magcorp conducted additional sampling to determine the extent of
accumulations of these compounds. Sampling results confirmed the accumulation of
small amounts of dioxin/furan compounds in soil and sediment from the process
wastewater collection and retention system, and that facility perimeter areas
contained only background levels of the compounds. Management does not expect
magnesium refineries to become subject to new regulations regarding these
compounds in the near future. If these compounds do become subject to government
regulation, the costs of such compliance, if any, could have a material adverse
effect on the Company's financial condition and results of operations; however,
such costs cannot be assessed at this time.
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Industrial companies such as Magcorp and Sabel have in recent years become
subject to changing and increasingly demanding environmental standards imposed
by governmental laws and regulations. The Company cannot currently assess the
impact of more stringent standards on its results of operations or financial
condition.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements," which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
industry capacity; demand; industry trends; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
changes in environmental regulations; successful completion of planned
installation of new technology; major equipment failures, import and customs
regulations, and outcome of litigation. These forward-looking statements speak
only as of the date of this report. The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such forward-looking statement is based.
PART II- OTHER INFORMATIONITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this Report on Form
10-Q is set forth in the "Exhibit Index" which immediately precedes
such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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